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French boutique fixed income head assesses effects of ECB’s corporate bond program

By: Adrien Paredes-Vanheule | 21 Sep 2016

The European Central bank’s corporate bond purchase program is very good news for the asset class but not only.

That is the view of Jean-Marc Bélières (pictured), portfolio manager and head of Fixed Income at Paris-based boutique Karakoram, he recently joined.

Bélières told InvestmentEurope the ECB will draw part of the corporate debt market. He says that as the market does not progress much because bonds’ depreciations and final redemptions are barely covered by new issuances, the existing paper will continue to richen by the end of 2016 and probably through 2017, at least the first half.

“As a result of a domino effect, some of the amounts that were to be invested over the corporate debt segment will be in other riskier asset classes either because paper will be missing or the yield will not be attractive enough for investors.

“These riskier asset classes I refer to include European high yield and/or govies issued by European countries that are poorly rated (Portugal 3% over 10-year bond) or govies issued by European countries that have a dubious reputation (Greece 7.90% over 10-year bond). The bad money takes the place of the good money,

“Everybody makes profit of the ECB’s purchase program and that includes all European bond funds which will perform very well whatever their segment,” Bélières assesses.

Karakoram’s fixed income chief believes that the ECB acting pro-actively brings an incentive deadweight effect to investors. Bélières says investors will or have already taken this opportunity because this is easy money without taking much risk.

“The over-allocation of diversified funds to the asset class across the world will remain. As they behave like sheep, they will only amplify the downward movement initiated by the ECB,” he adds.

Bélières estimates that once the ECB will state the game is over, panic will invade markets but he doubts such a decision could be made before 2018. He adds that the stop of the ECB’s purchase program will be progressive because the ECB knows the risks both the institution itself and bond fund managers are exposed to.

“However that mechanic can fail because of a number of geopolitical events such as a Greek bankruptcy, the invasion of Ukraine by Vladimir Poutine, Donald Trump winning the US presidential election or a civil war in China,” Bélières concludes.